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Why You Should Buy Into the Rally of Capri Stock

CPRI stock - Why You Should Buy Into the Rally of Capri Stock

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Shares of Capri (NYSE:CPRI) popped yesterday after the global fashion conglomerate formerly known as Michael Kors reported mixed third-quarter numbers that included a bullish, long-term, profit-growth forecast. Investors were pleased with that bullish forecast, and CPRI stock moved more than 10% higher.

The rally of CPRI stock is far from over.

At its core, Capri is a really beaten up, significantly undervalued stock that’s getting its groove back, thanks to improving company-specific and macroeconomic-retail trends. These trends will continue to improve through the rest of 2019. As they do, CPRI stock will continue to rally.

As of this morning, CRPI stock traded hands for just over $47. Based on my analysis of the company’s fundamentals, I believe that Capri Holdings stock could hit $70 within the next few months, as better-than-expected operating results and improving sentiment boost the stock’s depressed valuation.

As a result, investors should chase the current rally of CPRI stock.

Mixed Quarterly Numbers Overshadowed by Strong Guidance

Capri’s quarterly numbers were mixed.

The company’s profits beat analysts’ expectations, but its revenue came in below the consensus outlook and its. gross margin trends deteriorated. Although Capri’s Q4 operating margin trends improved, its operating margins still fell year-over-year. Comparable sales trends improved, too, but its comp sales fell year-over-year. Meanwhile, the company’s fourth-quarter and full-year 2019 profit guidance came in below expectations.

But none of that mattered because of Capri’s new, long-term growth targets, which paved the way for its earnings to keep rising by a lot over the long-run.

Specifically, CPRI issued preliminary fiscal 2020, 2021, and 2022 guidance. The guidance called for consistent mid-single-digit-percentage revenue growth, consistent margin expansion, and consistent double-digit-percentage earnings growth from a fiscal 2019 revenue base of $6.1 billion and an EPS base of $4.95. The key takeaway here is that EPS is expected to grow at a double-digit rate in 2021 and 2022.

Annual earnings increases of 10% or more were not baked into CPRI stock. Instead, investors were concerned that the Michael Kors brand was quickly losing steam, and that new revenue from Versace and Jimmy Choo would potentially dilute the company’s margins and slow its profit growth.

Management is saying loud and clear that that won’t be the case. Investors are listening. That’s why CPRI stock jumped more than 10% in response to what was, on its face, a mixed earnings report.

The Valuation of CPRI Stock Leaves It Poised for a Big Rally

Capri’s long-term guidance makes sense to me. I’ve long believed that the morphing together of three luxury fashion brands mitigates the financial risks and noise associated with fashion-trend cycles, while boosting brand awareness and image. Consequently, my thesis has been that turning Michael Kors  into CPRI will result in more stable revenue growth and margins, along with higher profits, going forward.

Management clearly agrees with this thesis. Now it’s providing guidance that reflects its view. Investors are rallying behind those numbers.

The rally of Capri Holdings stock will continue. Its earnings per share in fiscal 2020 is expected to be around $5. If its EPS increases 10% per year (which is the low end of management’s guidance), its fiscal 2022 EPS would exceed $6.  Assuming high-single-digit EPS growth thereafter, its EPS would reach $7 by fiscal 2024. Coincidentally, that is roughly where my model pegs the company’s EPS in five years, based on my assumptions of mid-single-digit revenue growth, gradual margin expansion, and some buybacks of CPRI.

Thus, it increasingly seems like $7 in EPS is doable by fiscal 2024. Apparel retail stocks normally trade for around 15 times  analysts’ forward earnings estimate. A 15 forward multiple on fiscal 2024 EPS of $7 implies a fiscal 2023 price target of $105. Discounted back by 10% per year, that equates to a fiscal 2019 price target of roughly $70 on CPRI stock.

Fiscal 2019 ends in a few months. Thus, based on fundamentals, CPRI stock should rally to $70 within the next few months.

The Bottom Line on CPRI Stock

Irrational fears regarding the integration of the Versace brand into the Capri fashion portfolio against the backdrop of a slowing global economy caused CPRI stock to fall off a cliff in late 2018.

Now, though, the global economy is stabilizing, and management is saying loud and clear that the top and bottom lines of Capri will increase at steady and healthy rates. As a result, sentiment towards Capri Holdings stock is turning a corner, and it will continue to improve over the next few months. As it does, CPRI stock will continue to rally.

As of this writing, Luke Lango was long CPRI. 

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